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Second charge mortgages

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  • A second-charge mortgage is an alternative to remortgaging your property
  • It uses your home as security, so make sure you can meet repayments
  • You must already be a homeowner to apply for a second-charge mortgage

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An alternative to remortgaging

Find out more about the advantages and risks of a second mortgage - a secured loan which can be an alternative to remortgaging.

Key points:

  • Second mortgages - also known as second-charge mortgages - are a type of secured loan and an alternative to remortgaging
  • A second mortgage is a loan that might be seen as an alternative option to remortgaging
  • Deals are secured against the equity you hold in your property and could put your home at risk if you miss payments
  • Some mortgage advisers don't advise on second-charge mortgages

From 21 March 2016, second mortgages have been governed by the FCA's mortgage rules, meaning they have similar affordability parameters to a first charge mortgage. 

Taking on more debt when you already have a mortgage is something to consider carefully, and is certainly not to be taken lightly.

What's a second mortgage?

A second mortgage is a secured loan which uses the borrower's home as security.

They are sometimes used to raise money if borrowers are unable or unwilling to remortgage, or to get an unsecured personal loan.

To get a second mortgage you have to already be a homeowner, but you don't need to live in the property.

For example, if you're a landlord you might be able to get a second mortgage secured against your rented property.

Taking out a second charge mortgage allows you to use any equity you have in your home as security against another loan, so that you basically have two mortgages.

However, if you fall into financial difficulties repaying either the first or second mortgage and your property is repossessed and sold to repay the debts, the first mortgage takes priority, with the second mortgage repaid using any remaining funds. 

Why get a second mortgage?

Unattractive remortgaging rates

A poor credit rating could lead to you paying more in interest if you're looking to remortgage, as you might not be able to access the most competitive deals.

Taking out a second mortgage could mean paying more interest on just the extra amount you want to borrow, rather than on your entire mortgage.

High early repayment charge

If your mortgage has a high early repayment charge, it could be cheaper to take out a second mortgage instead of remortgaging.

Self-employed

Being self-employed means you might not be able to access personal loans, so a second mortgage could be the only way for you to borrow a relatively small sum.

Advantages of second mortgages

A long term

Taking out a second mortgage allows you to borrow an amount of money over a long period of time, which could make monthly loan repayments more affordable.

Of course, repaying over a longer term is likely to mean you pay more in interest over the term.

Overpayment

You might be able to overpay your second mortgage and pay it off early to avoid paying too much in interest.

However, the option to overpay will depend on the terms and conditions of your mortgage and you could be faced with early repayment fees.

Disadvantages of a second mortgage

While second mortgages might be useful in some cases, there are some good reasons why you might want to consider other options – a professional mortgage advisor will be able to talk you through all your options.

Uncompetitive rates

If you've got a bad credit rating and can't remortgage, you probably won't be able to access competitive rates and you could end up paying a higher rate of interest on the second mortgage than you would with other options. Cutting the cost of debt

It could cost more overall

While taking out a second mortgage could make monthly repayments more affordable, you're likely to end up paying more in interest over the longer period.

Your home is at risk

If you can't keep up your first mortgage as it is, you should definitely avoid a second mortgage. If you fail to make your monthly repayments on either your first or second mortgage you would end up losing your home, so it's not a decision to be taken lightly.

If you're using it to pay off debt

Debt consolidation - borrowing money to pay off other money - can sometimes be a good idea, but there are serious downsides to consider.

While taking out a second mortgage to consolidate debt could seem like a good idea initially - mortgages usually charge a lower interest rate than unsecured loans and credit cards - you might end up paying more in the long term, as a second mortgage could run for 25 years.

What's more, you would be converting unsecured debt such as credit cards into secured debt, placing your home at risk.

You might not be able to move

Both the first and second mortgage will need to be cleared as part of any home sale. That could mean you're left with very little to use as a deposit on your next home.

Alternatives to a second charge mortgage

If you don't have a large early repayment charge on your mortgage and you have some equity in your home, you could be better off remortgaging than taking out a second mortgage. Instead of taking out a second charge loan, depending on the amount of money you need to borrow and your own personal circumstances, you might be better off with another type of loan, with options including peer-to-peer lenders.

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Instead of taking out a second charge loan, depending on the amount of money you need to borrow and your own personal circumstances, you might be better off with another type of loan, with options including peer-to-peer lenders.

By Emily Bater